Repaying Private Student Loans

By Mark Kantrowitz

Six months after you graduate or drop below half-time enrollment
status, you will have to start repaying your private student loans.

During this 6-month grace period, it is easy to forget about your
student loans. You may have moved for a new job. You have a lot of
start-up expenses, such as a security deposit on a new apartment,
utility deposits, the cost of furnishing an apartment, the cost of
business attire, the cost of buying a new car and other miscellaneous
expenses.

But, the payments on your loans are due, even if you don't receive a
statement or a coupon book. It is your responsibility to tell your
lender about any changes in your contact information. The lender will
eventually find you, but it may take them a few weeks or even months
to trace your current address. You don't want to be late on your very
first student loan payment.

Instead, now is the time to figure out what's what with repaying your
student loans.

Get Organized

Your first task is to get organized so you don't lose track of
any of your loans.

If you've been throwing all the lender mail in Ziploc baggies in your
freezer, now is the time to thaw out the correspondence.

Make a list of all your loans. Include the name of the lender,
the lender's web site and phone number, the loan ID number, the loan
balance at the start of repayment, the interest rate, the monthly
payment amount, the repayment plan and the date the first loan payment
is due.

Label a file folder with the lender's name and loan id
numbers. Keep copies of all correspondence with the lender in this
folder.

Put a reminder in your calendar two weeks before the first
payment is due on each loan. If you don't receive a statement or
coupon book by then, call the lender to find out where to send the
payment and to verify the payment amount.

What If You Lost Your Loans?

What do you mean, you lost your loans? How could you forget about
something so important? Actually, this is not all that uncommon.

If you don't remember who all your lenders are, call your college's
financial aid office to ask them if they have a list of all your
student loans. Chances are, they do, at least of the loans that
required school certification. They can provide you with the name of
the lender and the amounts borrowed, as well as the lender's contact
information. You can then call the lender to ask for help.

You can also get information about your federal student loans
at StudentLoans.gov. For
private student loans, get copies of all three of your credit reports
for free at
annualcreditreport.com. Your
private student loans should show up on at least one of your credit
reports.

Consider Student Loan Consolidation

Consolidating student loans replaces multiple loans with a single
loan. This can streamline and simplify repayment by giving you just
one monthly payment instead of several.

But, consolidation isn't always the best option. If one of your loans
has a much higher interest rate than the others, and you are capable
of making extra payments on your loans, you can save money by making
extra payments on the highest-rate loan. There are no prepayment
penalties on federal and private student loans. If you consolidate
your loans, however, you will no longer be able to target the loan
with the highest interest rate for quicker repayment.

When accelerating
repayment of the loan with the highest interest rate, make the
extra payment a day or two after your regular payment, to reduce
opportunities for confusion. Include a cover letter with the extra
payment that specifies the loan id number of the loan with the highest
interest rate. Tell the lender that you want this extra payment
applied to the principal balance of that loan. Tell them to
not treat the extra payment as an early payment of the next
installment, as you don't want them to skip the next payment's due
date.

Refinancing private student
loans might yield a lower interest rate, but only if your credit
scores have improved significantly. You must not only beat your
previous best credit score, but also the credit score of your
cosigner. It usually takes a few years of paying all your bills (not
just the student loans) in-full and on-time for you to get good enough
of a credit score to qualify for a better interest rate.

Choosing a Repayment Plan

Choose the repayment plan with the highest monthly payment you can
afford. This will pay off the debt faster than options with lower loan
payments and save more interest over the life of the loan. Increasing
the monthly loan payment increases your progress in paying off the loan
balance.

Dealing with Financial Difficulty

If you run into financial problems, talk to your lender to ask about
your options. You will have more options before you default, than
afterward. Student loans are almost impossible to discharge in
bankruptcy, so ignoring the problem will not make it go away.

The consequences of default are so severe and permanent
that you should do whatever you can to avoid defaulting on your
student loans. Not only will defaulting on a private student loan ruin
your credit, but your cosigner's credit as well. The lender will seek
repayment from your cosigner and add collection charges to your loan
balance. The lender can refer your loan to a collections agency and
can sue you in court. A court judgment against you will let the lender
garnish up to 25% of your wages, place levies on your bank accounts
and record liens against your property.

If your financial difficulty is short-term, such as unemployment or
medical/maternity leave, most lenders offer deferments and
forbearances. These suspend the obligation to make payments on the
loans. Interest will continue to accrue, and if unpaid, will be added
to the loan balance. This is called interest capitalization. To avoid
capitalization, ask about a partial forbearance, where you will make
interest-only payments for a limited time instead of suspending the
loan payments completely.

If your financial difficulty is long-term, such as your job doesn't
pay well enough to make your loan payments affordable, look into
alternate repayment plans. Alternate repayment plans include extended
repayment, graduated repayment and income-driven repayment. (Most
private student loans do not offer income-driven repayment.) These
repayment plans reduce the monthly payment by increasing the term of
the loan.

Also, look for ways to increase income and decrease expenses. Ask your
boss for a raise. Or work evenings and weekends at a second job to
earn more money to pay down your student loans. (An added benefit:
You'll have less time available to spend money.) Cut costs by
substituting free and low-cost items for more expensive items. For
example, drop your gym membership and get your exercise by walking
around the block. Read books borrowed from the public library. Get a
roommate to split the rent, or move back in with your parents. Sell
your expensive car and get a less expensive car or use public
transportation. Sell any belongings that haven't been used in a year
on eBay or Craigslist or have a garage sale.

Other Repayment Tips

Sign up for auto-debit and electronic billing on your student
loans. Not only will you be less likely to be late with a payment, but
many lenders give a slight interest rate reduction — typically,
a quarter or half a percentage point — as an incentive. It saves
the lender money, so they pass on the savings to you.